Mr. Ludwig, a former U.S. Comptroller of the Currency, is founder and CEO of consulting firm Promontory Financial Group. Any opinions are his own; GMAC Financial Services is one of Promontory’s clients.
The economic upheaval wreaking havoc on the global financial system is threatening to claim another victim: the domestic automobile industry and its financing arms.
General Motors Corp. could run out of cash by January without help. Ford Motor Co. and Chrysler LLC also need fast government intervention to stay solvent. Automakers and the UAW are making their case to Congress this week for emergency help. But even the supporters of a $25 billion aid package for the auto industry are dubious about whether they have the votes to pass it.
This raises the question, why not just let them go bankrupt? The domestic auto industry is everyone’s favorite whipping boy, and its problems have been growing for decades. Some are of its own making; many are circumstantial. But we cannot blithely accept its failure as somehow inevitable or deserved.
Our economy has been badly battered in recent months, and has become increasingly fragile. The erosion of our industrial base already presents real security risks to our nation. Why would we accelerate this sorry state of affairs at a time of national crisis by sitting on our hands and letting a signature American industry collapse?
The American auto industry is well worth saving, for many reasons. One reason is that for the past decade Detroit has made heavy investment and steady progress in improving its competitiveness, what it calls “altering the DNA” of American cars. US automakers spend $22 billion annually on plants, equipment, research and development. Breakthroughs are at hand in developing alternative fuel propulsion systems, and our national well-being and security depend upon seeing them through to completion.
If we allow U.S. automakers to go under out of anger, resignation, or ideology, it will only mean all the work and investment of the last decade will be ceded to our foreign competitors instead of being plowed back into the U.S. economy.
Another reason is the industry’s importance to the job market and the wider economy. Automobile manufacturing directly employs a quarter of a million workers and indirectly about one in ten U.S. jobs are related to some degree to the automotive sector, according to GM estimates. So the effects of a collapsed U.S. auto sector would not be limited to Detroit – they would be magnified as the ripples spread to related industries.
If we allow U.S. automakers to fail, millions of retirees depending on auto company pensions will be at risk and auto manufacturing jobs will disappear. The ripple effect won’t end there; millions of jobs in related sectors, such as U.S. manufacturers of steel, aluminum, iron, copper, plastics, rubber, electronics, and computer chips, will also feel the pain.
Worse yet, the promise of a meaningful future for American manufacturing would fade. As that promise dims, the role played by manufacturing jobs as a passport to the middle class would likewise disappear.
The auto manufacturers did not cause this crisis; they were working hard to reinvent the quintessential American invention when high oil prices and economic upheaval hit, dragging them into the vortex. There is a tendency to think that an example must be made, that someone must be allowed to fail. But do we really need to cut out of the heart of the real economy? When the patient is in the middle of a full blown coronary, it’s no time to discuss lifestyle changes.
We can and should revisit subjects like executive pay scales and expense controls when the industry isn’t at death’s door. For now, we should recognize the gravity of the moment, and use the TARP funds and pass necessary auto-related financial stabilization legislation to avoid digging a bigger hole for the national economy.
People seem to think that bankruptcy is the end. It's not. The airlines have proven this several times.
Chapter 11 will allow the auto makers to restructure their costs. Hopefully that restructuring would go from the factroy floor to the board room. In fact the feds should use the $25B loan as leverage to make a few changes.
There is no point putting Americans further in debt to finance the foolishness of high paid execs. It's time to pay the piper.
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Nonsense,
Give the auto industry billions now, and they’re just back later asking for more.
Repeat until we have no money to do anything at all.
Or we could put the money into transition benefits: unemployment, retraining, funding pensions if needed. In other words, to citizens as opposed to companies.
And maybe actually help someone.
I say let them sink!
The auto makers along with the UAW dug their own grave years ago. Let them lie in it. The wage/benefit packages are unbelievable and, most certainly, unsustainable. Frankly, I am very tired of “too big to fail”. The industry needs to be restructured. And I know this will mean large job losses. This industry needs to join the real world and it will not be pleasant. Millions of the rest of us know about job loss as through the years we worked for companies that weren’t “too big to fail”. To save the industry is a lost cause. It has to downsize and in a dramatic way. Sooner is much better than later. The American economy has gotten incredibly bloated and now the air is leaking from a thousand holes. All we’re doing now is trying to stop the thousands of leaks with trillions of dollars. Let it leak so we can get back to a reality based economy.
Remember Henry,
You know, Henry Ford. Who’s going to be the next Henry Ford of this new age. If you’re American and you don’t know who I’m talking about you better Google him. He created your auto industry from nil. Remember when the combustable engine was the latest thing, well Henry grabbed that idea and ran with it. The combustable engine is now the ‘Horse & Cart’, get my drift, it’s finished. The Plug-in Electric is the future, don’t deny it. Did the Government throw your tax dollar at the makers of the old Horse driven cart. Of course they didn’t, they were progressive, forward thinkers.
You all go on about getting rid of foriegn oil so it doesn’t dominate your lives. You whinge about pollution (Why do you think there’s so much cancer in the world? You know with the amount of combustable engines blowing toxins into the atmosphere(air) you are all heavy passive smokers). You whinge & whine and talk, talk, talk. Is that all you are good at. You all go to University, where are all your Engineers?
Get of your bums and do something, because the guy next to you isn’t going to save you.
The auto makers should file for bankruptcy and restart a non-uinion shop.
It seems to me that the SUV is a great choice of car. You can carry the soccer team and look cool. That’s why they sold so well. The only reason why they stopped selling is because of $4/gallon gas.
Now that the recession has hit, gas is $2/gallon. SUVs should be selling like hot cakes. It seems to me that small electric cars are not the way to go. People aren’t buying ANYTHING now because they don’t have money. It doesn’t matter what GM puts out. Look at the port of Long Beach. Thousands of unsold, fuel efficient foreign cars are clogging the port. So please, quiet with your, “GM mismanaged and didn’t listen to the consumer.”
Finally true, accurate and unbiased article. Majority of our society, at least it seems that way, truly does not understand the ramifications of chapter 11 for manufacturing sector with such a broad national span as the automotive industry. There is a tremendous difference between service industry without any product and long term commitments to its customers and the car industry which needs to provide warranties and services. I am tired to hear the bail-out word!! Let’s call it by its true name line of credit. I am also tired of our senators and congressman double standards and hypocrisy. It is thanks to their legislations we are in this financial crisis today. It is due to their policies that allowed converting bad loans to securities and allowing those to be insured. I have not seen any action on the part of our government or Congress to keep these financial wizards accountable for their actions. On the subject of accountability, perhaps our Congress should take a pay reduction to $1 until they manage to balance the budget!!!
The UAW workers are not paid, as many are made to believe, $76 an hour. This the burden cost to the company which includes benefits. The true earnings are in $25-35 range, which is in line with other car manufactures, another untrue misconception!!!
The economics 101, tells you that a country the size of the USA cannot and will not survive on the service industry alone. The manufacturing industry has for years provided wealth to this country. They invested into R&D, helped create and maintain small businesses, which are so vital to the overall economy. I am American by choice not by birth, and I am very proud of it. I lived in many countries all over the world and what amazes me the most is the fact the great number of born Americans take this country for granted and do not support their local communities and businesses. It is unthinkable to see top government officials or top CEO’s in countries like Japan, Germany and France driving any other vehicle than the one’s manufactured by their respective domestic automakers. The local media in these countries does not take any possible chance to pick on the local industry but to the contrary they support their national industry in an unbiased way. In closing, let’s focus on what is essential to the good health of the American industry and their people and stop proliferating the same misguided perceptions.
Jobless claims have hit a 16 year high, the market is below 8,000, and the economic news is overall deplorable. OK, so let’s add to the psychology of panic, and let a minimum of 250,000 more lose their jobs by throwing the automobile industry to the wolves of bankruptcy. These fellow Americans will stop buying and the economy will further contract, they will be on unemployment benefits which you will pay for, many will feed their families with foodstamps which you will pay for, crime will skyrocket which you will be a victim of, and families will be torn to sunder for which you will also pay the social cost. Is this really preferable to a bridge loan? It is not rocket science to see that this will be the straw that breaks the camel’s back and a downword economic spiral will turn to the whirlwind of a Depression. Please be careful what you wish for!
US Auto makers will fail until they can match the quality of Japanese brands. Take a look at Consumer Reports’ annual auto issue.
Why would anyone buy a car that has to be fixed three years into it’s life? This is not necessarily a manufacturing issue but also a design issue.
Yes, the US auto industry is important, but they must change or 15 years later, we’ll be having the same conversation.
Why would you bail them out?
Let them amalgamate and start to use their heads first before pissing your tax dollars against the wall. They didn’t catch on when the likes of Toyota moved in and started building small cars and took your market. They keep building gas guzzlers. Do they not understand the majority of people don’t want these types of cars. that’s why they can’t make a buck. They don’t listen to their customer. Complete arrogance. It’s what the US is famous for across the Globe, and you probably don’t even know that. It’s a shame, once a great creative people respected by the entire world can’t see past their own nose. Like we have said before(I shouldn’t have to repeat this , but here goes), “BUILD THE PLUG-IN ELECTRIC VEHICLE, THAT IS WHAT THE PEOPLE WANT!!!!!!” DID YOU GET THAT OR SHOULD I SAY IT AGAIN.
DO IT NOW OR SOMEONE ELSE WILL.
Well if and when Detroit wants to make serious changes, we’ll see all parties sitting at the bargaining tables again trying to work things out. It’ll take consessions from retirees, from current workers, from management, and from suppliers. Everyone that’s tied to the industry needs to pony up and sacrifice to make it survive. They need to change the way they conduct business. I don’t see any of that happening right now. They all have just run to Washington with their hands out to keep the status quo citing they need until 2010 before bargained changes will take effect. Well I say the heck with that. If it’s such and emergency, then they’d be trying to hammer things out right now. You can’t keep on going in the same direction and expect to get to somewhere else.
To aid the Big 3 or not.
Sometimes an alternative, while not a good thing, is the best of two evils.
The late Maurice Chevalier once said;
” While growing old is sometimes depressing, the alternative is much worse “.
” While aid to the Big 3 auto companies may not be too popular, the alternative is much worse “.
Some, many, have predicted that if the big three were to collapse, five million direct and at least another ten million supplier jobs, in the US and Canada, would disappear overnight. As well, another million and a half retirees would suddenly be left with no pension income and no health plans.
22 % of the total North American GNP would be instantly gone!
We could then be very close to an out and out depression!
I respectfully suggest there is a way to help these companies to immediately sell hundreds of thousands more new and used vehicles, AND NOT ONE PENNY OF OUR public monies would be injected directly into GM, Ford & Chrysler to pay pensions and health plans for retirees and multi million dollar severance packages for executives.
This is how I would suggest this be accomplished;
The US and Canadian governments grant anyone – individuals and company fleet vehicles alike – a $5,000 tax credit for each new and up to 3 year old used vehicle that they purchase.
This tax credit would be a direct deal between the governments and the buyers and the buyers could still cut other deals with the auto dealers like “ thousands off “ and “zero percentage financing”.
NO PUBLIC MONEY GOES DIRECTLY TO THE AUTO COMPANIES!
This initiative would result in the immediate sale of hundreds of thousands of vehicles – which, after all, is the main objective.
AND other positive spin-offs – hundreds of thousands of less “green” and some unsafe vehicles would be taken off the roads immediately thus adding to a cleaner environment and a little less dependency on foreign oil.
To those in the auto industry who may complain of Government subsidies and protectionism – while you have a point, drastic times call for drastic action.
Respectfully submitted.
Funny, the government didn’t bail out U.S. train manufacturers when they began to go out of business.
America long ago allowed the “Big 3″ to actively take steps to replace one of the worlds finest rail transportation systems in the world with miles of asphalt and SUVs. If any loans are extended to auto manufacterers, then equal amounts should go to railways and locomotive manufacturers as well.
Who’s next - shall we start throwing money at airlines too? They are experienced at Chapter 11 operations, maybe it would just be easier to replace Detroit’s executives with the executives from Southwest Airlines.
I say don’t bail them out. This is what they get for building lousy products for decades. They also don’t even build a lot of their models in the US, but the foreign automakers sure make a lot of their models here in the US. I also think the Big 3 have way too many models to chose from. They seem to hardly ever come out with something good, and build from it in future generations. Look at Honda, they’ve been building Accords and Civics for over twenty years continuing to make them relavent to current times. You can look at BMW too, same thing. They’ve been making the same models forever and updating them so they stay desireable. Granted, BMW and Honda do have new models, but they keep sticking to what works. GM should see that this method works. They’ve been getting great success with the Corvette for over 40 years, Ford has their Mustang. I say find a few models that people like, stick with them, and make them better. Instead, the come out with something like the Aztek.
I also find the construction of the foreign brands to be superior, especially when looking comperative models accross different brands. My rental car experiences recently also seem to prove this point. Bottom line is these companies have been doing wrong for too long, and they made this bed for themselves.
I am not sure whether a bail-out should be allowed. But I am pretty sure that in these conditions we cannot let the big Two - Ford and GM go down. The comparision with airlines industry re-surgency is non-sense. When I go to buy a air-ticket I only will look into which airline gives me ticket at lowest cost. I am not going to check whetehr how they fared in the past. I buy a ticket of airline means I am using it for one flight not every day. But buying a car is different. I will definitely look into the credibility of the producer. Why should I buy a car from a previously bankrupt company as I need service of it atleast every year and I also have to look into re-sale value of it. I am from India, here Daewoo released a car called Matiz. But then they stopped production and all the consumers were in deep trouble. So the underlining fact is that I will not buy a car from a guy who has previously gone bankrupt, why should i(especially when so many other options are there)?
But giving the money with no strings attached would be another mistake. I see this as an oppurtunity for the Obama administration to force them to do what he promised (bringing eco-friendly car).
‘The auto manufacturers did not cause this crisis’ - I agree! However ‘they were working hard to reinvent…’ is a bunch of bologney. Invent what? Hummers, Escalades, Yukons…. Invent what? Gas Gulpers - what a new concept. Detroit is a facility that has reached its point of being obsolete and useless, good bye dirty city. And the UAW as well, what purpose do they serve any more other than to line the pockets of the Union itself?
I have worked as Ford management. I have worked as Honda management. The Big 3 deserve NOTHING. The pivotal question taxpayers should be asking is: “How can Canadian & American executive and workers at foreign manufacturer plants in North America make the best cars in the world but the Big 3 can’t?”. The reason is simple, no amount of money will change the ignorant, lazy attitudes and sense of entitlement pervasive at the Big 3 from the President to union worker to mail room clerk. They DESERVE to go bankrupt, and starting with the Boards of Directors should be sued by the shareholders for breach of fiduciary care to the companies.
Its true that Chapter 11 is not the end, but the only ones that make out in those deals are the executives. The workers, who have put in years of dedicated service, will lose basically everything while the executives will be rewarded for their “good job” saving the company. People complain that UAW members can make what is equal $70 per hr (when you factor in benefits), but I don’t hear anyone complaining about government employees who average $104 per hr. Government intervention started this, they can fix it. The rest is just fashion and opinion.
We keep hearing the proposed sacrifices by the auto-makers: executive pay. This is a diversionary joke advanced by the proponents of the $25b loan (on top of the $25b loan approved for “retooling” — don’t make me lough). Obviously the legislators take the tax payers for fools. Dealing with executive pay is irrelevant, if not inappropriate, and will not make a dent in the inefficiencies plaguing the BIG-3. Instead, here are some of their real problems.
1. UAW. It is the legacy costs — stupid — that is at the core of what is ailing the BIG-3! a. no layoffs regardless of workload through “10-30% job bank” (while the BIG-3’s salaried & non-union workers are axed in the thousands); b. Health coverage with minimal copay for ins. premium, doctor visit or medications (for perspective my registered-nurse wife’s copay are $735/mo ins., $50 doctor visit & $20 for generic medication); c. Defined benefits for UAW workers & spouse with health coverage & pension (while the rest of us sweat with 401k with no company contribution).
2. Too many brands and models, approx. 100 for GM (70 too many) versus 30 for Toyota which sells more cars).
3. BIG-3 lose money on cars selling under $20,000. These cars cost more to produce than their Japanese equivalents, but can entice customers only when sold at 20% less than their Japanese equivalents.
4. Too many dealerships (60% more than required) that BIG-3 are prevented from terminating due to legacy structure.
5. And the list goes on and on…
Conclusion: Chapter 11 Bankruptcy is the only mechanism that can save the BIG-3.
I didn’t realize how much the workers were being paid. They could probably be cut back to a still-lavish wage and raise $25 billion in a very short time.
What do you get when you cross organized crime with welfare? Did you know that GM workers can fund Ford workers on strike, but if GM supported Ford during a strike it would be a federal crime?
Do you know how to play chicken? You just have to prefer death to defeat. It worked with Reagan and the Soviets. I’m tired of life with the UAW.